A positive outlook on fixed income trading under MiFID II

Michael Theel, Head of Fixed Income Trading (EMEA), Deutsche Asset Management

“We will see a reshaping of the bond trading landscape with major changes to how bond trading is executed with upcoming MiFID II regulation. On one hand, we will see better transparency with the higher requirements placed on our companies but on the other hand also an increased workload with the new requirements to monitor the execution process and the testing and verification of the trades” Theel told the Buyside Perspectives in his recent exclusive interview.

“In current times of declining liquidity and increasing complicated market structure, MiFID II is a catalyst for technological innovations which will enhance the fixed income trading process across all stages towards more efficiency and accuracy accessing liquidity. I look forward to a market with more real-time information and higher quality of data”

“The major benefits of the emerging electronic bond trading platforms are that we have higher accuracy of the pre-trade price and inventory discovery. In my team, we are in the front of this trend, having implemented new technologies and are looking to implement more”.

“We are particularly interested in the new types of data aggregation technology that consolidates current axes, inventory and indication of interest (IoI) from the liquidity providers in the market. We have already implemented several systems for fixed income which offer our counterparties the possibility to feed their axes and runs directly into our dashboard”.

The Portfolio Manager will submit the order with the correct ISIN and we will be notified when there is a match in our systems so we know when and which specific counterparty to contact and negotiate the price.
This new technology significantly optimises the time spent sourcing liquidity in the market place and minimising the risk of triggering adverse price movements by preventing us from acting like an elephant in the china shop. The new screens will help us finding the trading history on specific bonds and liquidity scoring tools. In the near future, we will also have transaction cost analysis (TCA) from the platform providers and specialist third party TCA vendors. The enhanced expertise and insight for the buy-side trading desk will motivate us, to not only take, but also make prices via the trading platforms that supports all-to-all trading. All-to-all trading technology enables both broader access to the sell-side as well as incremental access to buy-side inventory. Technology fuelled by a changing regulatory landscape will significantly improve the quality and amount of data. By using these “matching pools”, we are able to trade with more market participants, achieving better pricing within the bid-offer spread with a minimal footprint in the market.
Overall all-to-all trading will bring advantages for both the buy-side and the sell-side. The sell-side will be able to optimise their inventory easier, freeing up their balance sheet, to deliver a better liquidity sourcing service for the buy-side.

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While the evolving trend of electronification is important, we still prefer leveraging the high touch trading expertise of human traders when we trade in illiquid markets, complex products and large blocks. In these cases, we still need to use the trader’s individual expertise, intuition and relationships with our counterparties complemented with price discovery technology.

“Our job is to identify trading ideas, for long or short-term investments and communicate those ideas to the Portfolio Management.”

I define the role and tasks of the Head of Trading as:

• Constantly monitor trading risks and be much more involved in Level 1 control interactions with compliance.

• Looking at new technology for trading venues as well as market data to incorporate.

• Coach and develop the team to evolve from price taking to price making traders.

• Be a representative for Deutsche Asset Management fixed income trading to the regulators, the German Investment Funds Association “BVI”, due diligence meetings with prospective new clients and buy side exclusive meetings such as your own ‘Alpha Trader Forum’ (ATF). This gives a great opportunity for exchange and dialogue with different market participants to gain a more holistic understanding about our buy-side needs.

When it comes to the sell-side relationships, we focus mainly on the global players with a real market franchise and willingness to provide liquidity. We complement them with strong regional and niche / specialised banks.

“Balancing the strong trend of consolidating major flows, I also see the additional trend and need for specialised counterparties.”

Semi-annually, we have a formal cross-asset class performance review meeting with our Top 10 counterparties. The end result is a balanced holistic ranking of our counterparties based on qualitative and a quantitative input. The quantitative ranking is based on the trading volume and the qualitative overview is based on the hit ratio and feedback from each of the participants in the review. At the trading desk, we are primarily looking at past execution; what did we trade, with whom, in which segment and which instrument?